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What are the pros and cons of the Sarbanes-Oxley Act of 2002?

The pros of the Sarbanes-Oxley Act of 2002 are making financial reporting more accurate and reliable, decreasing fraud, expanding the criminal consequences for misconduct, and improving the confidence of investors. The cons include the high degree of self-policing it allows, the expense of implementing changes, and the slow pace of actual change.

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Both the Sarbanes-Oxley Act of 2002 itself and the developments it stimulated have had positive and negative features. Among the pros is the fact that it was especially influential in making financial reporting more accurate and reliable. The law contributed to decreasing fraud, in part by establishing new criminal consequences, or expanding those already in place, for numerous types of misconduct. A significant effect of the law was to improve investors’ confidence, which had been badly shaken by the scandalous abuses by Enron and other corporations.

To some extent, the distinction between pros and cons depended on different actors’ perceptions. Corporations that had shaky or unethical practices had little interest in tightening regulations. Related to the possible lack of desire to change was a criticism that the law lacked teeth. Critics found that it allowed for too much internal self-evaluation, which discouraged radical change. Although whistleblowers would supposedly be protected, fear remained that those most responsible could shift the responsibility onto others.

Another criticism was the greatly increased expense of implementing the required changes, especially in Section 404; these requirements would disproportionately affect small businesses—and honest executives—that were least able to absorb the costs. Many were concerned as well that actual change would not happen quickly enough because of the complexity of the regulations and the dependence on newly established institutions to enforce them.

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